BAY OF PLENTY ELECTRICITY LTD V VECTOR GAS LTD CA CA444/07

BAY OF PLENTY ELECTRICITY LTD V VECTOR GAS LTD CA CA444/07 1 September 2008IN THE COURT OF APPEAL OF NEW ZEALAND CA444/07 [2008] NZCA 338BETWEEN BAY OF PLENTY ELECTRICITY LIMITED Appellant AND VECTOR GAS LIMITED Respondent Hearing: 3 and 4 June 2008 Court: Chambers, Ellen France and Baragwanath JJ Counsel: H N McIntosh and T G Smith for Appellant J E Hodder and K E Hadfield for Respondent Judgment: 1 September 2008 at 3 pmJUDGMENT OF THE COURT A The appeal is allowed in part. The judgment upholding the validity of Vector Gas Limited's ("NGC's") notice of termination of its agreement given by letter dated 2 August 2004 is confirmed. B The judgment in favour of NGC on its amended counterclaim is set aside. We substitute the following orders: (1) A declaration that the terms of the interim agreement were such that Bay of Plenty Electricity Limited ("BoPE") undertook to pay NGC on demand for each GJ of gas supplied, the difference between the price set out in the BoPE agreement (as escalated) and $6.50 per GJ (including all transmission and metering costs), plus interest at the interest rate set out in the BoPE agreement.(2) To the extent that, pursuant to the High Court judgment, BoPE has paid additional monies for transmission and metering, and interest on those sums, all such sums and interest are to be repaid by NGC with interest at the Judicature Act 1908 rate from the date of payment by BoPE to the date of repayment by NGC. C BoPE must pay to NGC costs of $6,000 plus usual disbursements. We certify for second counsel. D If the parties cannot agree on costs in relation to the High Court hearing, costs in the High Court should be determined by that Court. REASONS OF THE COURT(Given by Ellen France J)Table of ContentsPara No.Introduction [1]Issues on the appeal [11]Did NGC validly terminate the 1995 BoPE Agreement? [12]The contractual background [12]THE MAUI GAS CONTRACT [13]THE NGC CONTRACT [18]THE B OPE AGREEMENT [23]The pleadings [29]The High Court decision [31]BoPE's argument on appeal [34]A special clause? [38]Construction of GC 9.1.6 [51]The effect of the Strawman agreements [67]The effect of the interim agreement [73]The counterclaim [74]The chronology [76]The competing contentions [88]Discussion [90]Costs [100]Result [102]Introduction[1] This case concerns the termination by NGC New Zealand Limited (now Vector Gas Limited but in this judgment referred to as "NGC") of its agreement to supply gas to Bay of Plenty Electricity Limited ("BoPE"). [2] The agreement between NGC and BoPE ("the BoPE agreement") has its genesis in an earlier, 1973, contract under which a group of mining companies agreed to supply gas from the Maui gas field to the Crown for a term of 30 years. That contract was known as the Maui gas contract. It included provision for a two- yearly redetermination of the Economic Recoverable Reserves in the field and for consequential effects on rights of supply. [3] Subsequent to the Maui gas contract, the Crown entered into an agreement to supply some of its Maui gas to NGC. That contract and later amendments ("the NGC contract") also provided for adjustments on rights of supply consequential on a redetermination. [4] NGC and BoPE entered into the BoPE agreement in 1995. It was a long-term (11 year) agreement under which NGC agreed to supply gas to BoPE at agreed prices. NGC is a gas transmitter, distributor and seller. BoPE is an electricity retailer with industrial, commercial and residential customers in the Eastern Bay of Plenty. BoPE needed gas to meet its contractual commitments to supply energy and steam to a co-generation plant operated by Fonterra at a dairy factory in Edgecombe. [5] In early 2003, a redetermination was undertaken by an independent expert, Mr Spellman, under the Maui gas contract. Mr Spellman's assessment essentially halved previous estimates of the remaining economically recoverable Maui gas. [6] The redetermination led to a great deal of debate and discussion in the course of which Methanex New Zealand Limited (another downstream purchaser and a methanol producer) commenced proceedings challenging the redetermination. Matters were resolved in June 2004 by the parties entering into a suite ofagreements, which, amongst other things, amended the Maui gas contract. These agreements are collectively known as the "Strawman" agreements. [7] In August 2004, NGC gave written notice of termination of the BoPE agreement effective from 31 October 2004. NGC did so in reliance on a clause in the General Terms and Conditions ("GC") part of the BoPE agreement which provided that:9.1 In cases where 9.1.6 There is a redetermination under the Maui Gas Contract and as a result the ability of NGC to supply or deliver Maui Gas is reduced to any extent, then NGC may terminate this Agreement by notice in writing to [BOPE].[8] BoPE challenged NGC's ability to terminate and filed proceedings in the High Court. The parties meanwhile reached an interim agreement to preserve supply until a decision was made on BoPE's challenge to NGC's termination notice and on a counterclaim by NGC relating to the price to be paid for gas in terms of the parties' interim agreement. [9] The dispute proceeded to a hearing before Harrison J who delivered his decision on 3 August 2007: HC WN CIV-2004-485-2287. Harrison J held that NGC had validly terminated the contract and upheld NGC's counterclaim. In terms of the counterclaim, the Judge concluded that the parties had agreed that the figure of $6.50 per GJ (gigajoule), referred to by the parties as the price of gas supplied post-termination, was exclusive of transmission costs. [10] BoPE appeals against this decision.Issues on the appeal[11] There are two main issues on the appeal. The first is whether NGC validly terminated the 1995 BoPE Agreement in reliance on GC 9.1.6. The second is whether the Judge was right to find that the parties agreed that BoPE was required topay $6.50 per GJ plus transmission costs for gas supplied from 1 November 2004 to 30 June 2006.Did NGC validly terminate the 1995 BoPE Agreement?The contractual background[12] There are three relevant agreements that require consideration in determining this first issue. The Crown buys Maui gas from mining companies under the Maui contract. The Crown then sells gas to NGC who in turn sell to BoPE. We deal with each contract in turn.THE MAUI GAS CONTRACT[13] The first agreement chronologically is the Maui gas contract entered into on 1 October 1973 by a number of mining companies ("the Maui mining companies") and the Crown: see [1973] II AJHR D5A at 211. Under this contract, the Maui mining companies agreed to supply gas from the Maui gas field to the Crown for a term of 30 years. The Maui gas contract took effect from the first delivery of gas on 28 June 1979. [14] Article 6 of the Maui gas contract set up a regime for determining the initial quantity of, and then reviewing the quantity of, Economic Recoverable Reserves. The Economic Recoverable Reserves are defined in Article 1.1 as:[T]he quantities of Gas that are estimated to be economically recoverable from the Maui Field as determined or redetermined from time to time under the provisions of Article 6 hereof.[15] Article 8 sets out the Maui mining companies' delivery requirements to the Crown and the Crown's corresponding purchase entitlements. [16] Broadly, the Crown has the right each day to purchase the "Maximum Daily Quantity" as set out in the table in Article 8.1.7 (Article 8.1).[17] The contract foreshadows the possibility that a redetermination of the Economic Recoverable Reserves under Article 6.1 may mean there is a shortfall. A shortfall occurs under Article 8.8 where the Economic Recoverable Reserves "are found to be exceeded by" the gas already produced and the obligation to supply gas under Article 8.1.1. In those circumstances if a shortfall remains after other avenues, such as cancelling other contracts, are exhausted then the Daily Quantities to which the Crown is entitled are reduced. Ultimately, if there is still a shortfall then there is a "knock on" effect on the Maximum Daily Quantities and the Maximum Hourly Quantities (Article 8.8.1 – 8.8.7).THE NGC CONTRACT[18] The second relevant agreement is the NGC contract, that is, the contract between NGC and the Crown. This agreement is dated 1977 but was amended in 1990 to operate with another agreement between the Crown and Generate Developments Limited ("GDL"). The latter, Crown/GDL agreement, is not relevant for present purposes. [19] The background to this contract is that the Crown realised that it did not need all of the Maui gas it had contracted for and so contracted to sell some of that gas downstream to various purchasers including NGC. Under this contract, NGC can take a pre-defined share of the Crown's Maui gas entitlements. Hence, clause 1.1 records the basis of the contract, namely, that:[T]he quantity of Gas available to NGC (together with GDL) under this Contract (and the GDL Gas Contract) is 27.4725 percent of the Gas and Non-Quality Gas Recoverable from the Maui Field and which the Crown is entitled to purchase under the Maui Gas Sale and Purchase Contract. The quantity of Gas estimated by the Crown to be available to NGC (together with GDL) under this Contract (and the GDL Gas Contract) is 825 PJ [petajoules], being 27.4725 percent of the Crown's estimate (as at 1 October 1989) of the Economic Recoverable Reserves of the Maui Field (less the quantity of Gas previously taken from the Maui Field) of 3,003 PJ.[20] "Gas" under this contract means, broadly, "Maui gas" (clause 11.2). [21] For these purposes, reference should also be made to clause 4.2.1 which provides that the NGC annual entitlement to take Maui gas is limited to a share ofthe "Permitted Allocation". "Permitted Allocation" is a defined term and means a percentage of the Crown's Revised Annual Quantities under the Maui gas contract, but with a 67 PJ minimum (clause 1.2). [22] Finally, clause 4.8 sets out what happens on a redetermination under the Maui gas contract. The consequences flow automatically from the redetermination in the sense that no other triggering event is required before those consequences occur.THE BoPE AGREEMENT[23] Finally, we turn to the BoPE agreement entered into between NGC and BoPE on 10 October 1995 for the supply of gas. The agreement provides for the supply of an Annual Contract Quantity of 1250 TJ (terajoules) and was to continue until 30 June 2006. The agreement annexes NGC's General Terms and Conditions which include, relevantly, the provisions set out below. [24] The first provision we should mention is GC 7 which is described as a "force majeure" provision. GC 7.1 provides that NGC shall not be liable for damages to the Customer (BoPE) for any delay to the commencement date. GC 7.2 and 7.3 provide that:7.2 Notwithstanding the other provisions of this Agreement, the Customer and NGC shall each be relieved from liability under this Agreement in the following cases: 7.2.1 In the case of NGC to the extent that on account of Force Majeure NGC has not delivered or is unable to deliver Gas in the quantity requested by the Customer pursuant to this Agreement; and 7.2.2 In the case of the Customer to the extent that on account of Force Majeure the Customer has not taken delivery of Gas pursuant to this Agreement or has failed to perform any of its obligations under the Agreement. 7.3 The Party affected by any such cause shall endeavour to remove or remedy the same with all due diligence and shall resume supply or acceptance of Gas immediately such cause is removed or remedied.[25] "Force majeure" is defined in GC 22 as an event or circumstance beyond the control of NGC or the customer which:[R]esults in or causes a failure by such party in the performance of any obligations imposed on it by this Agreement notwithstanding the exercise by such party of reasonable care and shall include but not be limited to Acts of God, strikes, lockouts or other industrial disturbances, acts of the Queen's enemies, sabotage, acts of war, blockades, insurrections, riots, epidemics, lightning, earthquakes, floods, storms, fires, washouts, explosions, breakage of or accident to machines, pipelines or associated equipment, freezing of wells or delivery facilities, well blowouts, craterings, the necessity for making repairs to or reconditioning wells, machinery, equipment or pipelines (not resulting from the fault or negligence of the relevant party) nuclear accidents, arrests and restraints of rulers and peoples, civil disturbances, and the order of any court or government authority, any sudden partial or entire failure of the gas supply to NGC (not resulting from the fault or negligence of the Party claiming the existence of an event of force majeure as hereby defined) whether under force majeure claimed by the vendors of NGC gas supplies or otherwise, and includes a failure to make payment for any gas where supply has not been made due to an event of force majeure already referred to, and also includes failure to deliver Gas where the Customer cannot take Gas due to an event of force majeure already referred to.[26] Second, GC 9 is headed "Default" and provides that in cases where:9.1.1 Either NGC or the Customer defaults in payment of any moneys payable under this Agreement for a period of five Business Days of notice from the Party not in default requiring the remedy of the default; or 9.1.2 Either NGC or the Customer defaults in the performance of any of the other covenants or obligations imposed upon NGC or the Customer by this Agreement and in addition fails to remedy or remove the cause or causes of default within a period of thirty days of notice from the Party not in default requiring such Party to remedy or remove the cause or causes of default; or 9.1.3 If a resolution is passed or an order made by the Court for the winding up of the Customer except for the purposes of reconstruction or amalgamation; or 9.1.4 If the Customer shall be placed in liquidation; or 9.1.5 If the Customer shall make or enter into or endeavour to make or enter into any composition assignment or other arrangement with or for the benefit of its creditors; or 9.1.6 There is a redetermination under the Maui Gas Contract and as a result the ability of NGC to supply or deliver Maui Gas is reduced to any extent; then in the cases of clauses 9.1.1 and 9.1.2 the Party is not in default and in all other cases NGC may terminate this Agreement by notice in writing to the other Party.[27] Third, GC 11 deals with priority of service and says that:NGC may give the Customer notice to reduce or suspend the use of Gas where in the reasonable discretion of NGC the situation so requires. Notice may be given verbally and shall be subsequently confirmed in writing. Without limiting the scope of the discretion of NGC notice may be given by reason of actual or threatened shortage of Gas or in the interest of public health, welfare and safety. Neither Party shall be liable in damages to the other for any reduction or suspension in supply of Gas or for any other act, or omission which but for this present clause might constitute a breach of this Agreement.[28] Finally we note that, in terms of GC 14, clause headings do not affect the interpretation of the agreement.The pleadings[29] The statement of claim contains one cause of action, namely, breach of the BoPE agreement. BoPE pleads that NGC's notice of termination was invalid because there had been no reduction in NGC's ability to supply or deliver Maui gas and, alternatively, if there had been such a reduction that was not as a result of a redetermination but was as a result of the Strawman agreements and/or NGC's entry into new gas supply contracts with other customers. [30] NGC counterclaimed in relation to the interim agreement and we deal with the pleadings on this aspect when we consider the effect of the interim agreement.The High Court decision[31] Harrison J found in favour of NGC. In doing so, the Judge rejected BoPE's argument that GC 9.1.6 referred to a reduction in NGC's physical ability to supply or deliver Maui gas, not to its legal entitlement. Harrison J did so for the following reasons: (a) The effect of the redetermination was that under the NGC contract with the Crown, NGC's rights to Maui gas were reduced: at [48].(b) "Ability" is a "relative" concept and what a gas supplier is able to do is subject to the contractual constraints under which the supplier operates: at [49]. (c) GC 9.1.6 is concerned with NGC's ability to supply gas generally and a redetermination having the effect of halving NGC's entitlement to Maui gas would "necessarily" affect NGC's outstanding commitments to all buyers (at [54]). The Judge accordingly accepted NGC's characterisation of GC 9.1.6 as a "demand management tool" which enabled NGC to "take all necessary steps to balance its remaining supply and demand profile. NGC's right was not limited to a snapshot in time but necessarily embraced all contingencies": at [54]. (d) NGC's approach had the advantage of certainty. In particular, it avoided debate over NGC's ability or otherwise to meet its supply obligations over the duration of the agreement: at [62]. [32] In the context of dealing with BoPE's arguments about causation, Harrison J also rejected BoPE's submission that GC 9.1.6 was in the nature of a force majeure provision. It followed the Judge said at [72], that there was no duty on NGC to mitigate, as contended by BoPE. The Judge at [68] saw GC 9.1.6 as "conceptually different" from force majeure provisions:It expresses the parties' foresight of a particular event – the redetermination – and of the prospect that it may entitle NGC to bring the contract to an end as a consequence once the right to cancel was exercised, its effect was permanent. The contractual process of biannual determinations and redeterminations was an agreed certainty. While the outcome of the redetermination was beyond the control of either NGC or BoPE, the event itself was the antithesis of something sudden or unexpected in the nature of an emergency. And the result did not lead to a failure by NGC to perform its obligations but to a discretionary right to cancel.[33] Finally, Harrison J did not accept BoPE's argument that if there was a reduction in the ability to supply and deliver that was as a result of the Strawman agreements. The Judge said at [110] that the Strawman agreements did not change the nature or effect of the redetermination. Rather, Harrison J said at [110]:In consequence of a reduction in NGC's ability to supply 'Maui Gas' operated through the mechanism of Strawman instead of clause 4.8 [of the Crown-NGC agreement]. Whatever contractual path was followed, the result of the redetermination remained the same in terms of [GC] 9.1.6; NGC's rights to Maui gas under the [Maui gas contract] was reduced by 138 PJ.BoPE's argument on appeal[34] BoPE's case is that GC 9.1.6 is triggered where NGC's physical ability to supply or deliver Maui gas is reduced in some way. In developing this submission Mr McIntosh, who argued this part of BoPE's case, made two key points. [35] First, he said that GC 9.1.6 was a special clause in the nature of a non- frustrating supervening event provision such as a force majeure or an exemption clause. BoPE says that this characterisation follows because GC 9.1.6 excuses the performance of NGC's contractual obligations in the circumstances of an event beyond NGC's control. The relevance of the characterisation as a special clause, BoPE argues, is that the rules of construction applying to those clauses must then be adopted including rules about where the burden of proof lies, the implication of a duty to mitigate, and the application of the contra proferentem rule. [36] Second, Mr McIntosh submitted that even on an approach to interpretation simpliciter GC 9.1.6 operated only in cases of physical reduction in supply. [37] The other limb to BoPE's case relates to the effect of the Strawman agreements.A special clause?[38] We agree with Harrison J that GC 9.1.6 is not a special clause in the nature of a force majeure or exemption clause. Rather, as will be seen, we accept NGC's submission that GC 9.1.6 is a means by which NGC can manage the demand and supply balance for its portfolio.[39] As is explained in Beale (gen ed) Chitty on Contracts (29ed 2004) at [14-147], "force majeure" is not a "term of art in English law, although it is well known in continental legal systems, for example that of France". Chitty continues at [14-147]:[T]he meaning of force majeure may nevertheless be ascertained by reference. Thus the incorporation into a contract of sale of the Force Majeure (Exemption) Clause of the International Chamber of Commerce will mean that a party is not liable for failure to perform any of his obligations in so far as he proves: (1) that the failure was due to an impediment beyond his control; and (2) that he could not reasonably be expected to have taken the impediment and its effects upon his ability to perform the contract into account at the time of the conclusion of the contract; and (3) that he could not reasonably have avoided or overcome it or at least its effects.(See also: Swadling "The Judicial Construction of Force Majeure Clauses" in McKendrick (ed) Force Majeure and Frustration of Contract (2ed 1995) at 5 – 8.) [40] Swadling says at 8 that, in English law, an event will be a force majeure event:[I]f it constitutes a legal or physical restraint on the performance of the contract (whether or not occurring through human intervention, although it must not be caused by the act, negligence, omission or default of the contracting party) which is both unforeseen and irresistible. (Emphasis added.)[41] In those circumstances, the courts will impute by special rules of construction terms that will avoid or reduce injustice. A similar approach is taken to exemption clauses. [42] It is, however, not apt to apply these special rules to GC 9.1.6 which is dealing with events (a redetermination) which were foreseeable and at the centre of the parties' contract. The contingency of the original Maui prediction being revised was to the forefront as was GC 9.1.6 despite the somewhat odd positioning of the clause amongst other default provisions.[43] It is also relevant, as NGC submits, that GC 9.1.6 is triggered where there is a reduction "to any extent" to the ability to supply. That the threshold triggering the clause is set at this low level suggests the clause is not in the nature of a force majeure clause. [44] The existence of a specific force majeure clause in the contract is not determinative, as NGC accepts. It is, however, pertinent that the contract has a separate force majeure provision including a duty to mitigate and anticipating the resumption of performance. The notion of resuming performance is seen also in clause 5 of the BoPE agreement which provides for an adjustment of the Minimum Annual Quantity of gas supplied in "the case of a Force Majeure event pursuant to [GC] 7.2.2 or a reduction or suspension of supply pursuant to clause 11 of the General Terms and Conditions". [45] BoPE's other argument that this is a special clause draws on the jurisprudence relating to "hindered" or scarcity of supply clauses and in particular relies on Tennants (Lancashire) Limited v CS Wilson and Company Limited [1917] AC 495 (HL). [46] We agree with Harrison J at [73] that Tennants "cannot be abstracted into a general principle of 'hindered supply' which governs the operation" of GC 9.1.6. Rather, the case turned on the construction of the particular clause in issue. In that respect, we also consider the Judge was right that Tennants can be distinguished. [47] In Tennants, the appellants had contracted to sell to the respondents their requirements of magnesium chloride over the year 1914, estimated at from 400 to 600 tons. At the time the contract was entered into, the appellants could obtain some magnesium chloride for a limited period from a company called United Alkali, some from other small manufacturers, and, more importantly, from Germany. [48] The appellants had enough magnesium chloride to meet all its supply requirements when the outbreak of war in August 1914 brought supplies to a halt. The appellants gave notice suspending delivery to all buyers. At that point, some240 tons remained undelivered to the buyer (the respondents). The buyer needed supplies urgently, obtained them from elsewhere and then sued for damages. [49] The contract allowed deliveries to be suspended (see 496): pending any contingencies beyond the control of the sellers causing a short supply or otherwise preventing or hindering the manufacture or delivery of the article.[50] Their Lordships, in concluding that the suspension was justified, said that a rise in price would not of itself constitute a hindrance to delivery (see, for example at 510 per Earl Loreburn). As Harrison J observed at [76], the point on this aspect was put in perspective when at 516 Lord Dunedin said: Where I think, with deference to the learned judges, the majority of the Court below have gone wrong is that they have seemingly assumed that price was the only drawback. I do not think that price as price has anything to do with it. Price may be evidence, but it is only one of many kinds of evidence as to shortage. If the [sellers] had alleged nothing but advanced price they would have failed. But they have shown much more. They have shown a total failure of what after all was the main source of supply to their business, namely, the German article .The context in which the issue arose in Tennants was the construction of provision dealing with suspension rather than termination. Further, the clause in that case only came into effect where there were contingencies "beyond the control of the seller" which affected manufacture or delivery.Construction of GC 9.1.6[51] We turn then to consider the interpretation of GC 9.1.6 on the application of ordinary principles. There is no challenge to the Judge's description of those principles which was as follows:[23] The Court is to adopt an objective approach in determining the presumed intention of the parties. In this context the commercial purpose of the contract is a relevant consideration: Lewison, The Interpretation of Contracts (3rd ed) 2004, Chapter 2; Potter v Potter [2003] 3 NZLR 145 (CA) at [33] – [37].[24] The principle of particular relevance to this case is Lord Hoffmann's statement: Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 at 912: Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contracts. [Emphasis added][52] As we have said, BoPE's case is that GC 9.1.6 applies where there is some reduction in NGC's physical ability to supply gas. In amplification, BoPE makes a number of points. [53] First, the contract would have used the language of entitlement rather than deliverability if the condition meant legal capacity. It is further submitted that deliverability has a particular meaning in the gas industry. [54] Second, BoPE points out that the contract does not refer to NGC's main contract and BoPE could not be taken to have known the terms of that contract. The latter is a private contract and there is no reference to it in this agreement. In the situation where the words are capable of two meanings, the inevitable conclusion is that BoPE would have assumed that this would mirror the Maui gas contract. Further, BoPE knows that NGC is a gas aggregator, it gets its gas from a number of sources and so could assume that it can supply its customers with a guaranteed quantity because it is pulling gas from a range of sources. In this context, BoPE said that the contra proferentem rule would apply. [55] Third, BoPE submits that the result of the High Court judgment is an absurd one in that any small movement downwards following a redetermination will trigger the clause. That is so, even if there are no immediate problems for NGC in delivering. This led to the submission that the decision to terminate is really one about price. BoPE emphasises in this respect that GC 9.1.6 applies if the ability to supply is "reduced". [56] Having considered the matters raised by BoPE, we conclude that NGC is right that the condition is triggered by a reduction in NGC's legal capacity to supply.We reach that view for a number of reasons. First, on its ordinary meaning, "ability" must include legal capacity. Second, against the factual matrix of this contract, NGC's approach is plainly right. We say that given the link in the condition to a redetermination affecting the supply of "Maui gas". The ability has to relate to goods affected by a redetermination which draws the link back to the Maui gas contract. The issue is then one of the source of the gas (Maui gas), rather than price. [57] In this context, we do not consider that much weight can be given to the fact that other language might have been used or to the fact that "deliverability" may have a specialised meaning. [58] Nor do we believe it is critical whether or not BoPE knew how NGC was affected by a redetermination. We agree with NGC's submission that it is sufficient to show that the redetermination had an impact on the Crown's entitlements which in turn impacted on NGC. The Maui gas contract itself is a matter of public record: "Development of the Maui Gas Field" (White Paper) [1973] II AJHR D5A. [59] As to the suggestion that the contra proferentem rule applies, the high point of BoPE's argument on this point is probably that GC 9.1.6 forms part of NGC's general, and therefore standard, conditions for NGC's contracts. However, Chitty at [14-009] notes that the contra proferentem rule encompasses two different but "closely related" principles. The first of these principles is that, because the party seeking to rely upon an exemption clause has the burden of proving that the clause applies, "any doubt or ambiguity will be resolved against" that party. The second principle is that, "in situations of ambiguity the words of the document are to be construed more strongly against" the drafter: at [14-009]. Further, TreitelFrustration and Force Majeure (2ed 2004) observes at [12–023] in the context of a discussion on provisions for supervening events that:Although there may be a tendency to construe a clause of the present kind narrowly against the party seeking to rely on it, there is no rule of law to this effect.[60] In our view, this is not a case where the matter is so finely balanced that it is necessary or appropriate to resort to this principle. The language is plain and we emphasise in this respect that both NGC and BoPE are substantial parties.[61] The third reason for favouring NGC's interpretation is that there is evidence that the contract price for Maui gas was low by contemporary production cost standards at the time the BoPE agreement was made. Harrison J at [16] accepted the evidence from Stephen Bullock, Division Manager – Gas Sales, for NGC that, as the Judge put it:By 1995 industry participants knew the contract price of Maui gas was low by contemporary (or new) production cost standards; the Maui field would eventually be depleted; and of the risk of a redetermination of [the Economic Recoverable Reserves], resulting in a reduction in the entitlements of buyers such as NGC to Maui gas (although industry insiders viewed this prospect as relatively low).[62] NGC's Manager, Wholesale Energy, James Seymour, also gave evidence that during the 1990s and early 2000, the market price for gas in New Zealand was low by world standards. [63] That evidence would support the proposition that BoPE may well have run the risk of termination because it meant it got a better deal at the time. [64] In terms of BoPE's argument about the absurdity of the result, there is merit in NGC's argument that a redetermination does have an effect on NGC's hypothetical potential new customer, effective immediately. At that point, NGC can, for example, no longer offer the new customer a ten year contract because before the end of the ten year period it will not have enough Maui gas to meet that commitment. NGC's ability to supply "is" therefore affected. [65] Finally, there is also something in NGC's submission that what was described in the course of the hearing as the "brutal" capacity of GC 9.1.6 is tempered by market reality. That is reflected in the fact that only three of NGC's 23 contracts for the supply of Maui gas were terminated. [66] It may be that an argument could be made that NGC has to terminate within a reasonable period of time following a redetermination. In other words, a party in BoPE's position should not have the "sword of Damocles" hanging over it. That argument was presumably not run in this case because NGC's behaviour was seen as reasonable in the circumstances given the prospect that the redetermination might bechallenged and the negotiations which led to the Strawman agreements. We now turn to the effect of those agreements.The effect of the Strawman agreements[67] BoPE's argument on the Strawman agreements is that any reduction in NGC's ability to supply or deliver Maui gas resulted from the new contractual arrangements reflected in the Strawman agreements and not from the redetermination. In developing this submission, BoPE says that NGC's entry into the Strawman agreements was voluntary. Further, BoPE submits that Strawman amounted to an agreement by the parties to put Article 8 of the Maui gas contract to one side in favour of a new and broader approach. [68] There is no dispute between the parties that the two key changes effected by the Strawman agreements were, first, that the Crown (and in turn downstream purchasers) achieved security of future supply of 367 PJ. The second change was that NGC and Contact Energy Limited (another gas wholesaler) obtained rights of first refusal in respect of all gas produced from the field over 407 PJ ("ROFR gas"). The 40 PJ difference over 367 PJ is supplied directly to Methanex. [69] We agree with Harrison J that while the Strawman agreements redefined NGC's entitlement, they did not bring about the reduction in NGC's ability to supply or deliver. That reduction resulted from the effect of the redetermination on NGC'S entitlement. [70] Ultimately, BoPE's argument on the Strawman agreements is another way of making the point that there was no right to terminate because there has been no effect on NGC's ability to physically take gas. There can be no doubt that the redetermination reduced NGC's "ability" in the broader sense. But for that redetermination, there would have been no reduction and no Strawman agreements. [71] Finally, NGC must be right that the ROFR gas NGC can obtain under the Strawman agreements is not the same entitlement as it had under the Maui gascontract. It is a right to buy from Seller (broadly, the Maui mining companies), not from the Crown. [72] For these reasons, Harrison J was right to conclude NGC had validly terminated the BoPE agreement.The effect of the interim agreement[73] After NGC gave notice to BoPE in early August 2004 that it was terminating the BoPE agreement, BoPE indicated that it would challenge the validity of that notice. Protracted negotiations followed. In October 2004 the parties reached an interim agreement for the supply of gas, pending determination of BoPE's challenge to the notice of termination. As we have noted, the issue here is whether the parties' interim agreement was for NGC to supply gas to BoPE at a price fixed in accordance with the BoPE agreement (which provides a price inclusive of transmission and network costs) or that price plus those costs. The effect of the difference in the parties' positions is described by the Judge at [123], by reference to Mr Bullock's evidence:[H]e calculated that: (1) the amount owed by BoPE for gas supplied at prices according to the BoPE agreement from 1 November 2004 to 30 June 2006 was $10.084m; (2) the amount owed for gas charged at $6.50 per GJ plus transmission costs for the same period was $14.767m; and (3) the amount owed for gas charged at a bundled price was $11.503m. The difference, on this assessment, in NGC's right of recovery under a valid notice of cancellation is about $3.26m .The counterclaim[74] This aspect was the subject of NGC's amended counterclaim. That claim is summarised by Harrison J at [115] in the following terms:NGC alleges that on or about 15 October 2004 BoPE agreed to pay it for each GJ of gas supplied after 30 October the price for delivered gas payable under the terms of the BoPE agreement and, in the event that NGC's termination was held to be valid, and on demand, (1) a gas only price of $6.50 per GJ supplied; plus (2) NGC's posted charges for transmission and network costs associated with the delivery of such gas; less (3) the price paidfor delivered gas payable under the terms of the BoPE agreement; together with (4) interest on the balance at the contractual rate of interest.[75] There was an alternative claim based on quantum meruit but that was not dealt with in the High Court and was not referred to in argument before us.The chronology[76] Before we discuss the submissions and undertake our evaluation of this aspect, it is helpful to set out the history of the parties' correspondence. [77] After NGC's notice of termination in early August 2004, BoPE wrote on 9 August 2004 contesting the termination and proposing arbitration. NGC responded to BoPE by letter dated 12 August 2004 confirming NGC's intention to terminate and raising the possibility of a temporary arrangement for ongoing supply post-termination. Representatives of the parties met on 8 September 2004. BoPE raised the possibility of seeking injunctive relief. That possibility was firmed up in a letter of 17 September 2004 from BoPE to NGC which referred to forthcoming proceedings and an application for an interim injunction pending confirmation of ongoing gas supply. [78] The next item of correspondence we should mention is BoPE's letter of 24 September 2004 which asked for advice as to "the price upon which NGC would supply gas to BoPE". [79] NGC's response, of 28 September 2004, said that its offer "provides two term/pricing options with transportation and metering passed through at cost". Only the first of these options is relevant. The letter set out the "basic" details of the offer as follows:Option 1 (Original term)1 November 2004 to 30 th June 2006, Gas Energy at $6.50 per Gigajoule.[80] Then, on 5 October 2004, Russell McVeagh wrote on behalf of BoPE to NGC. The letter said that BoPE could not accept the "offer of new terms" becauseof "the severity of the price discrepancy which they indicate". The letter went on to say that BoPE was filing substantive proceedings in the High Court and so the "issue therefore arises as to a supply of gas pending determination of the litigation." The letter then set out the parties' positions noting for NGC that NGC's letter of 28 September had confirmed "the sale price of the gas (ie $6.50 per GJ)". [81] The course proposed by BoPE was that NGC undertake on a without prejudice basis to continue to supply gas on the basis of the 1995 BoPE agreement pending determination of the proceedings. Further, that BoPE undertake to file the proceeding in a timely manner and to:(aa) pay NGC on demand, for each GJ supplied, the difference between the [BoPE Agreement] price and $6.50 (or the current market price, whichever is the lower), plus interest; or (bb) at BoPE's election, provide NGC with an equivalent amount of gas as taken by BoPE from 1 November 2004, (if: (i) such gas is available from other gas fields; and (ii) Maui open access allows that gas to be transmitted to market).[82] Chapman Tripp replied on 8 October 2004 on behalf of NGC stating that, without prejudice to its position, NGC would continue to supply gas based on the BoPE agreement pending determination of BoPE's proceeding on two conditions. First, BoPE's undertaking to file its proceeding by 31 October 2004 and, second, BoPE agreeing to pay NGC the difference between the price set out in the BoPE agreement and $6.50 per GJ, plus interest at the rate set out in the BoPE agreement, in the event BoPE was unsuccessful. [83] Russell McVeagh responded on 15 October 2004 accepting the price formula but seeking clarity about the effect of discontinuance and about BoPE's ability to terminate the interim supply arrangement. [84] In a letter of the same date, Chapman Tripp accepted BoPE's suggested changes and set out the terms of the proposal in full, "for the avoidance of doubt". [85] The terms were as follows:3 Without prejudice to its position, NGC will continue to supply gas based on the [BoPE] Agreement (the "Agreement") pendingdetermination of BoPE's proceeding, or 30 June 2006, whichever is the earlier, provided that BoPE undertakes to: 3.1 file that proceeding on or before 31 October 2004; and 3.2 in the event that BoPE is unsuccessful in, or withdraws, that proceeding, pay NGC on demand, for each GJ supplied, the difference between the price set out in the Agreement (as escalated) and $6.50 per GJ, plus interest at the Interest Rate set out in the Agreement, provided that such payment obligation will not be triggered by a discontinuance which results from a settlement between the parties (the "Interim supply arrangement"). 4 BoPE may terminate the interim supply arrangement at any time on 7 days notice in writing. Such termination will not relieve BoPE of any payment obligation to NGC already incurred under the interim supply arrangement, including the requirement set out in paragraph 3.2 above.[86] Russell McVeagh confirmed BoPE's agreement to those terms in a further letter on 15 October. [87] The final chapter in this chronology to which reference should be made is a letter of 20 October 2004 from Chapman Tripp which said that the terms of the proposal for interim supply "might be slightly misleading". The letter continued:We understand that the $6.50 only applies to the price for Gas Energy, and that separate charges for transportation apply. This is a slight change from the charging methodology under the [BoPE agreement] where the prices for the individual components are bundled, but is consistent with the terms of NGC's offer of 27 September 2004 [in fact 28 September] on which the proposal is based.The competing contentions[88] BoPE's argument on this point is that the terms of the interim agreement are as set out in the letter of 15 October from Chapman Tripp to Russell McVeagh. BoPE says it is not appropriate to consider the parties' pre-contractual negotiations but, in any event, there was no agreement that "$6.50 per GJ" referred to an unbundled price, as NGC contends. [89] NGC maintains the argument, accepted by Harrison J, that in the interim agreement the parties treated the phrase "$6.50 per GJ" as "shorthand" for the gas energy price. Mr Hodder submits that it is critical that the "$6.50" price referred toin the 15 October letter does not spell out whether it is an "energy price" or a "delivered price" and so it is necessary to refer to the context. That context, NGC argues, is that NGC was terminating the agreement which was based on relatively low priced Maui gas and was only willing to continue to supply on terms reflecting the contemporary market prices. NGC says that BoPE was accepting of that approach in a situation where the termination was upheld.Discussion[90] Both parties' contentions can draw some support from the statements of the relevant principles encapsulated in Lewison The Interpretation of Contracts (4ed 2007). First, at 31, Lewison makes the point that the intention of the parties is the meaning of the contract and in that respect cites from this Court in Board of Trustees of the National Provident Fund v Shortland Securities Ltd [1996] 1 NZLR 45 at 50 that the parties, "particularly knowledgeable and experienced parties, legally advised" are to be taken as intending what they have said. Second, at 69, Lewison observes:Evidence of pre-contractual negotiations is not generally admissible to interpret the concluded written agreement. But evidence of pre-contractual negotiations is admissible to establish that a fact was known to both parties; where the parties have agreed the meaning of a word or phrase in negotiations; to decide (in a consumer contract) whether a term has been individually negotiated; and to determine which party put forward a particular term.[91] We have concluded that the starting point is the letter of 8 October. That letter effectively resumed negotiations after Russell McVeagh on 5 October had rejected NGC's settlement proposal. The letter of 8 October proposed that in the interim BoPE pay NGC, "for each GJ supplied, the difference between the price set in the [BoPE agreement] and $6.50 per GJ, plus interest". As a wholly new proposal, there is no occasion to look earlier in the chain of negotiations: Prenn v Simmonds [1971] 3 All ER 237 (HL). [92] Further, in our view, the terms of the agreement in the 15 October letter from Chapman Tripp are clear. Importantly, in that letter, NGC agreed to "continue to supply gas based on the terms of the [BoPE agreement]". The letter also providedthat in the event that BoPE was unsuccessful in these proceedings, BoPE was to pay NGC "for each GJ supplied, the difference between the price set out [in the BoPE agreement] (as escalated) and $6.50 per GJ, plus interest". The letter is plain that the price is the price as per the BoPE agreement, that is the price inclusive of transmission costs. [93] Harrison J in accepting NGC's approach was influenced by what the Judge described at [128] as the "inherent" implausibility of NGC agreeing to an interim arrangement under which BoPE would be better off than if it lost its challenge to the validity of NGC's notice of termination. However, there is force in BoPE's contention that reputational matters come into play here. After all, as we have noted in the consideration of the termination issue, NGC did not want to lose all of its customers. Further, part of the context was that BoPE had, as we have said as early as 9 August 2004, indicated it was contesting the termination and the possibility of proceedings were similarly foreshadowed at an early point. [94] The other aspect on which the Judge placed some weight was that NGC's construction did not cause any difficulties "in implementation" and that fixing the transmission costs "will be simply a mechanical exercise": at [132]. We note that the position may, however, be less clear cut. We say that because, although there was evidence that the transmission costs were publicly available and posted on NGC's website, NGC's letter of 28 September said that, because of timing difficulties, transportation and metering rates had not been included in NGC's proposal. [95] Even apart from the fact that the terms of the letters of 8 and 15 October are clear, and even if the parties' pre-contractual negotiations were relevant, there are difficulties with NGC's argument that the parties had agreed on a shorthand or dictionary term. [96] NGC's response of 28 September contemplated a settlement in the form of a new arrangement for the supply of gas rather than an interim resolution. The high point of NGC's case is that although BoPE rejected the notion of a new agreement at a higher price, that rejection did not encompass the interim arrangement. Theproblem with this is the clear rejection by BoPE in the letter of 5 October of the offer of new terms "because of the severity of the price discrepancy which they indicate". It is hard to see that, BoPE having rejected the offer on the basis of price, can be taken to have accepted the higher price in referring to the price thereafter. [97] In the face of the clear words in the 15 October letter, NGC's real argument has to be that there was a mistake. That would be consistent with the illogicality apparent in Russell McVeagh's letter of 5 October which rejects NGC's offer of new terms with the higher price but also accepts that if BoPE is unsuccessful, it would enter into an undertaking on the terms set out in [81], above. [98] The notion that there may have been a mistake is also reflected to some extent at least in the letter of 20 October from Chapman Tripp which, as we have noted, suggested that the terms of the proposal for interim supply "might be slightly misleading". However, mistake is not pleaded and rectification is not sought so we need take this no further. [99] For these reasons, we consider the appeal in relation to the counterclaim must succeed.Costs[100] Both parties have had some success. In assessing what costs order is appropriate, it is also relevant that the greater part of the hearing was devoted to the termination issue. That no doubt reflects the respective preparation times as well. In those circumstances, a costs award reflecting a 75:25 split is appropriate and we make an order accordingly. We certify for second counsel. [101] If the parties cannot agree on costs in the High Court, it is appropriate for any dispute to be resolved in that Court.Result[102] It follows that the appeal is allowed in part. The judgment upholding the validity of NGC's notice of termination of the BoPE agreement given by letter dated 2 August 2004 is confirmed. The judgment in favour of NGC on its amended counterclaim is set aside. As to the form of the orders substituted on the counterclaim, there is not a great deal of difference between the parties. NGC's submission was that if BoPE succeeded in relation to the effect of the interim agreement, the order should reflect BoPE's original pleadings. We agree and order B(1) is aligned with those pleadings. Order B(2) simply follows as a matter of logic.Solicitors: Russell McVeagh, Wellington for Appellant Chapman Tripp, Wellington for Respondent